Edison International 10-Q Summary
Business context and reporting period
Combined quarterly report for Edison International and wholly owned Southern California Edison Company (SCE) for the three and six months ended June 30, 2019, filed July 25, 2019. SCE supplies and delivers electricity across approximately 50,000 square miles of Southern California. Edison Energy Group provides competitive energy services but was not material as a separate segment.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Edison International operating revenue | $2.812 billion | $2.815 billion | $5.636 billion | $5.379 billion |
| Net income attributable to common shareholders | $392 million | $276 million | $670 million | $494 million |
| Basic EPS | $1.20 | $0.85 | $2.05 | $1.52 |
| Operating income | $500 million | $420 million | $852 million | $750 million |
| Net cash from operating activities | Not separately provided | Not separately provided | $598 million | $1.217 billion |
| Capital expenditures | Not separately provided | Not separately provided | $2.235 billion | $2.159 billion |
SCE reported operating revenue of $2.800 billion for the quarter and $5.616 billion for the six months. Net income available for SCE common stock was $419 million for the quarter and $712 million for the six months, compared with $297 million and $583 million, respectively, in the prior-year periods.
Management reported Edison International core earnings of $515 million for the quarter and $721 million for the six months, compared with $274 million and $536 million in the prior-year periods. Core earnings are a non-GAAP measure and exclude significant non-core items.
At June 30, 2019, Edison International had total assets of $59.521 billion, total liabilities of $46.608 billion, total debt of approximately $17.575 billion including current debt, and shareholders' equity of $10.720 billion. SCE had total assets of $59.237 billion, total liabilities of $43.745 billion, and total debt of approximately $14.238 billion including current debt.
Edison International held $257 million of cash and cash equivalents, while SCE held $26 million. SCE had approximately $2.6 billion available under its $3.0 billion revolving credit facility; Edison International Parent had approximately $1.5 billion available under its $1.5 billion facility. SCE's debt-to-total-capitalization ratio was 0.48 to 1, and Edison International Parent's was 0.58 to 1, both within applicable covenant limits.
Material changes versus the prior comparable period
- Edison International common-shareholder earnings increased $116 million in the second quarter and $176 million for the six months. SCE was the primary contributor.
- SCE core earnings increased $245 million in the quarter and $180 million for the six months, mainly due to adoption of the 2018 General Rate Case (GRC) decision, timing of wildfire insurance and mitigation cost deferrals, and higher FERC formula-rate revenue.
- SCE recorded a $170 million impairment charge, or $123 million after tax, for historical capital expenditures disallowed in the 2018 GRC decision, primarily certain pole replacements. This was treated as a non-core item.
- The GRC decision reduced previously recognized revenue and resulted in a $554 million regulatory liability for customer refunds, expected to be refunded through December 2020. The decision authorized revenue requirements of $5.451 billion for 2019 and $5.863 billion for 2020.
- Operating cash flow declined to $598 million from $1.217 billion for Edison International and to $673 million from $1.312 billion for SCE. The decline reflected regulatory asset and liability movements, wildfire insurance payments, and timing of working-capital items.
- SCE capital expenditures increased to approximately $2.2 billion for the six months from $2.1 billion. SCE forecasts 2019-2020 capital expenditures of approximately $9.3 billion to $9.5 billion, including $887 million to $1.087 billion of wildfire mitigation-related spending.
- Interest expense increased by $55 million for Edison International and $47 million for SCE for the six months, primarily because of increased borrowings and interest on balancing-account overcollections.
Guidance, outlook, risks and unusual items
- SCE committed to contribute approximately $2.4 billion by September 10, 2019, plus approximately $95 million annually for ten years, to the insurance fund contemplated by California AB 1054. Edison International expected to raise approximately $1.2 billion through equity issuance and SCE approximately $1.2 billion through long-term debt.
- The anticipated AB 1054 contribution could produce a material earnings charge, not exceeding the contribution amount, and may temporarily limit SCE's access to first-mortgage bond financing.
- AB 1054 also prevents approximately $1.6 billion of SCE wildfire-mitigation capital expenditures from being included in the equity portion of rate base. SCE expects to finance this amount through securitized bonds.
- The company had accrued $4.7 billion for the 2017/2018 wildfire and mudslide events and recorded expected insurance recoveries of $2.0 billion plus $135 million of expected FERC rate recovery. Management stated that the actual loss could exceed the accrued amount but could not estimate an upper end of the range.
- Wildfire-related claims remain subject to extensive litigation, regulatory proceedings, and uncertainty regarding causation, inverse condemnation, negligence, insurance coverage, and recovery through customer rates. As of July 22, 2019, SCE reported at least 191 Thomas and Koenigstein Fire-related lawsuits and at least 98 Woolsey Fire-related lawsuits.
- AB 1054's insurance-fund protections, including a new prudency standard and potential liability cap, depended on timely contributions by SCE and SDG&E, continued safety certification, and the fund not being exhausted. SCE obtained an initial 12-month safety certification on July 25, 2019.
- SCE and Edison International retained investment-grade ratings but with negative outlooks or negative watch: SCE was rated Baa2 by Moody's, BBB- by Fitch, and BBB by S&P; Edison International Parent was rated Baa3, BBB-, and BBB, respectively.
- SCE's 2020 cost-of-capital application requested a 16.60% CPUC return on equity, a 52% common-equity capital component, and a projected 10.96% weighted-average return on rate base. The application was subject to regulatory review and was being reevaluated in light of AB 1054.
- SCE's 2019 FERC formula-rate filing requested a 17.12% base ROE, including a 6% wildfire-risk component. The filing was accepted for hearing and settlement procedures and remained subject to refund.
- Fuel and purchased-power costs, customer departures to community choice aggregators, regulatory deferrals, insurance costs, interest rates, credit ratings, collateral requirements, San Onofre decommissioning, cybersecurity, and regulatory cost recovery remain significant operating and liquidity risks.
Most important facts for investors to verify
- Whether SCE and SDG&E made the required AB 1054 contributions and whether the insurance fund was established.
- The accounting and financing consequences of SCE's approximately $2.4 billion AB 1054 contribution, including any earnings charge, equity issuance, and debt issuance.
- Updates to wildfire litigation, insurance recoveries, regulatory cost recovery, and the $4.7 billion accrued liability.
- Progress and final outcomes of the 2018 GRC refunds, FERC formula-rate proceedings, and SCE's 2020 cost-of-capital application.
- Actual capital spending and recovery of wildfire mitigation expenditures, including the approximately $1.6 billion excluded from rate base.
- Changes in credit ratings, available liquidity, collateral requirements, dividends from SCE, and access to debt markets.
- Implementation risks and regulatory recoverability of SCE's planned 2020 customer service system.